The flaws of an oil import fee

ByMeg Lundsager, Meg Lundsager teaches international economics at the University of Maryland.June 15, 1982

The economics of an oil import fee is dismal economics indeed. Some policymakers and economists have suggested that such an import fee could generate badly needed revenues for the federal government. However, that fee would have several negative effects on our economy, effects which outweigh the benefit to the nation.

The oil import tariff or fee is attractive, claim its supporters, for the following reasons. By raising the price of imported oil several dollars a barrel , the import fee will reduce imports of oil, discourage consumption, and encourage American production of oil as domestic oil prices rise along with import prices. The reduction in imports is considered beneficial as it reduces our dependence on unreliable foreign suppliers. For the same reason increased domestic production is desirable. Energy self-sufficiency has been a recognized national goal since the cutoffs in supply and price hikes of the early 1970s. Conservation of oil, a natural resource in ultimately limited supply, is also wise.

Two new twists to the argument for an import fee have evolved recently. The first is that our economy has invested many resources in the development of domestic oil and other energy supplies in anticipation of ever increasing oil prices. With the recent softening in world oil prices the fear was that these investments would now prove unprofitable, resulting in losses for the companies engaged in domestic energy development. The second is that an oil import tariff could provide desperately needed revenues to the federal government at a time when new estimates seem daily to project larger and larger budget deficits. There are estimates that a $4 per barrel tariff on imports of oil could reduce the budget deficit by about $8.5 bilion annually for the next three years.

Inflation and stagnation: Projections are that a $4 oil import fee would add one percentage point to the 1983 inflation rate and would reduce real growth in our economy by one percentage point in 1983. Given the current recession in the US economy and the resolve of the Federal Reserve to keep monetary growth slow in order to reduce the inflation rate, an import fee which raises the inflation rate will prolong the period of tight money and high interest rates. Economic recovery will be pushed even further off. Instead we should realize that the recent fall in oil prices, if only temporary, has reduced the inflation rate and should help economic recovery along. With gasoline and other energy costs taking a smaller share, consumers find they have more income to spend on other goods. Such spending creates demand for goods and therefore jobs.

Budget deficit: The attractiveness of an oil import fee as a revenue generating measure diminishes when we recognize that the higher inflation rate due to the tariff will also mean higher government expenditures. Outlays for transfer payments with cost-of-living adjustments will go up; the slowdown in economic recovery will mean more people out of work longer and higher government outlays for unemployment compensation. Consequently an oil import fee might not reduce the deficits after all.

Dependence on foreign supply: If we truly are worried about the stability of foreign suppliers of oil we should not rush to use up all our own supplies. An oil import fee reduces imports and increases domestic production. We end up conserving their supply and not ours. Why not save our oil in the ground and buy the foreign oil when we can get it at attractive prices. We should stockpile it in the strategic petroleum reserve if we need a cushion against an abrupt shut-off of foreign supply. It makes little sense to consume all our own oil now so as to be less dependent on foreign oil later.

Despite the superficial attractiveness of an oil import fee, its cost would appear to outweigh its benefits, especially when we are considering it as a partial solution to the federal government's budget crunch. The other consequences of this import fee, its inflationary and depressing effects on the economy plus the more rapid depletion of our own resources it causes, overwhelm any benefits to the domestic oil industry.